Document
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2016
 
Or
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition Period from                to                
 
Commission File Number: 0-29174
 
LOGITECH INTERNATIONAL S.A.
(Exact name of registrant as specified in its charter)
 
Canton of Vaud, Switzerland
(State or other jurisdiction
of incorporation or organization)
 
None
(I.R.S. Employer
Identification No.)
 
Logitech International S.A.
Apples, Switzerland
c/o Logitech Inc.
7700 Gateway Boulevard
Newark, California 94560
(Address of principal executive offices and zip code)
 
(510) 795-8500
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  ý  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ý   No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 

1

Table of Contents

Large accelerated filer  ý
 
Accelerated filer  o
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o
  No  ý
 
As of July 15, 2016, there were 161,733,462 shares of the Registrant’s share capital outstanding.


2

Table of Contents

TABLE OF CONTENTS
 
 
 
Page
 
 
 
Part I
FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
Exhibits
 
In this document, unless otherwise indicated, references to the “Company” or “Logitech” are to Logitech International S.A., its consolidated subsidiaries and predecessor entities. Unless otherwise specified, all references to U.S. Dollar, Dollar or $ are to the United States Dollar, the legal currency of the United States of America. All references to CHF are to the Swiss Franc, the legal currency of Switzerland.
 
Logitech, the Logitech logo, and the Logitech products referred to herein are either the trademarks or the registered trademarks of Logitech. All other trademarks are the property of their respective owners.

The Company’s fiscal year ends on March 31. Interim quarters are generally thirteen-week periods, each ending on a Friday of each quarter. The first quarter of fiscal year 2017 ended on July 1, 2016. The same quarter in the prior fiscal year ended on June 26, 2015. For purposes of presentation, the Company has indicated its quarterly periods as ending on the last day of the calendar quarter.


      

3

Table of Contents

PART I — FINANCIAL INFORMATION 

ITEM 1.   FINANCIAL STATEMENTS (UNAUDITED) 

LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
 
 
 
Three Months Ended
June 30,
 
 
2016
 
2015
Net sales
 
$
479,864

 
$
447,686

Cost of goods sold
 
309,625

 
289,753

Amortization of intangible assets and purchase accounting effect on inventory
 
1,613

 

Gross profit
 
168,626

 
157,933

Operating expenses:
 
 

 
 

Marketing and selling
 
83,872

 
75,796

Research and development
 
31,951

 
28,002

General and administrative
 
25,740

 
28,812

Amortization of intangible assets and acquisition-related costs
 
1,293

 
168

Restructuring charges (credits), net
 
(85
)
 
11,538

Total operating expenses
 
142,771

 
144,316

Operating income
 
25,855

 
13,617

Interest income, net
 
151

 
255

Other expense, net
 
(1,008
)
 
(1,019
)
Income before income taxes
 
24,998

 
12,853

Provision for (benefit from) income taxes
 
3,057

 
(7
)
Net income from continuing operations
 
21,941

 
12,860

Loss from discontinued operations, net of taxes
 

 
(5,423
)
Net income
 
$
21,941

 
$
7,437


 
 
 
 
Net income (loss) per share - basic:
 
 

 
 

Continuing operations
 
$
0.14

 
$
0.08

Discontinued operations
 

 
(0.03
)
Net income per share - basic
 
$
0.14

 
$
0.05


 
 
 
 
Net income (loss) per share - diluted:
 
 
 
 
Continuing operations
 
$
0.13

 
$
0.08

Discontinued operations
 

 
(0.04
)
Net income per share - diluted
 
$
0.13

 
$
0.04


 
 
 
 
Weighted average shares used to compute net income (loss) per share:
 
 

 
 

Basic
 
162,130

 
164,431

Diluted
 
164,303

 
166,895

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Table of Contents

LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(unaudited)
 
 
 
Three Months Ended
June 30,
 
 
2016
 
2015
Net income
 
$
21,941

 
$
7,437

Other comprehensive income (loss):
 
 
 
 
Currency translation gain (loss), net of taxes
 
(296
)
 
2,618

Defined benefit pension plans:
 
0

 
 
Net gain (loss) and prior service costs, net of taxes
 
310

 
(1,130
)
Amortization included in operating expenses
 
433

 
416

Hedging gain (loss):
 
 
 
 
Deferred hedging gain (loss), net of taxes
 
965

 
(2,262
)
Reclassification of hedging loss (gain) included in cost of goods sold
 
740

 
(2,460
)
Other comprehensive income (loss):
 
2,152

 
(2,818
)
Total comprehensive income
 
$
24,093

 
$
4,619

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


5

Table of Contents

LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
 
 
June 30,
2016
 
March 31,
2016
Assets
 


 
 
Current assets:
 
 

 
 

Cash and cash equivalents
 
$
440,111

 
$
519,195

Accounts receivable, net
 
192,242

 
142,778

Inventories
 
247,792

 
228,786

Other current assets
 
36,533

 
35,488

Total current assets
 
916,678

 
926,247

Non-current assets:
 
 

 
 

Property, plant and equipment, net
 
87,044

 
92,860

Goodwill
 
244,880

 
218,224

Other intangible assets
 
49,262

 

Other assets
 
87,090

 
86,816

Total assets
 
$
1,384,954

 
$
1,324,147

Liabilities and Shareholders’ Equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
292,664

 
$
241,166

Accrued and other current liabilities
 
167,317

 
173,764

Total current liabilities
 
459,981

 
414,930

Non-current liabilities:
 
 

 
 

Income taxes payable
 
59,720

 
59,734

Other non-current liabilities
 
106,333

 
89,535

Total liabilities
 
626,034

 
564,199

Commitments and contingencies (Note 12)
 


 


Shareholders’ equity:
 
 

 
 

Registered shares, CHF 0.25 par value:
 
30,148

 
30,148

Issued and authorized shares —173,106 at June 30 and March 31, 2016
 


 


Conditionally authorized shares — 50,000 at June 30 and March 31, 2016
 


 


Additional paid-in capital
 

 
6,616

Less shares in treasury, at cost — 11,374 at June 30, 2016 and 10,697 at March 31, 2016
 
(144,663
)
 
(128,407
)
Retained earnings
 
983,268

 
963,576

Accumulated other comprehensive loss
 
(109,833
)
 
(111,985
)
Total shareholders’ equity
 
758,920

 
759,948

Total liabilities and shareholders’ equity
 
$
1,384,954

 
$
1,324,147

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


6

Table of Contents

LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
 
 
Three Months Ended
June 30,
 
 
2016
 
2015
Cash flows from operating activities:
 
 

 
 

Net income
 
$
21,941

 
$
7,437

Non-cash items included in net income:
 
 

 
 

Depreciation
 
13,105

 
10,516

Amortization of intangible assets
 
1,708

 
732

Loss (gain) on equity-method investment
 
(1
)
 
103

Share-based compensation expense
 
8,517

 
6,749

Excess tax benefits from share-based compensation
 
(3,280
)
 
(665
)
Deferred income taxes
 
(1,048
)
 
(6,732
)
Changes in operating assets and liabilities, net of acquisitions:
 
 

 
 

Accounts receivable, net
 
(48,661
)
 
(41,208
)
Inventories
 
(10,007
)
 
(54,164
)
Other assets
 
(1,171
)
 
(2,383
)
Accounts payable
 
42,769

 
34,541

Accrued and other liabilities
 
(10,135
)
 
19,475

Net cash provided by (used in) operating activities
 
13,737

 
(25,599
)
Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(7,420
)
 
(15,290
)
Investment in privately held companies
 
(320
)
 
(240
)
Acquisition, net of cash acquired
 
(53,987
)
 

Purchase of other intangible asset
 
(715
)
 

Release of restricted cash
 
715

 

Purchase of trading investments
 
(4,229
)
 
(903
)
Proceeds from sales of trading investments
 
4,231

 
840

Net cash used in investing activities
 
(61,725
)
 
(15,593
)
Cash flows from financing activities:
 
 

 
 

Purchases of treasury shares
 
(24,422
)
 
(8,814
)
Proceeds from sales of shares upon exercise of options and purchase rights
 
599

 
4,066

Tax withholdings related to net share settlements of restricted stock units
 
(9,185
)
 
(1,296
)
Excess tax benefits from share-based compensation
 
3,280

 
665

Net cash used in financing activities
 
(29,728
)
 
(5,379
)
Effect of exchange rate changes on cash and cash equivalents
 
(1,368
)
 
1,761

Net decrease in cash and cash equivalents
 
(79,084
)
 
(44,810
)
Cash and cash equivalents, beginning of the period
 
519,195

 
537,038

Cash and cash equivalents, end of the period
 
$
440,111

 
$
492,228

 
 
 
 
 
Supplementary Cash Flow Disclosures:
 
 
 
 
Non-cash investing activities:
 
 

 
 

Property, plant and equipment purchased during the period and included in period end liability accounts
 
$
3,502

 
$
10,358


7

Table of Contents

The following amounts reflected in the statements of cash flows are included in discontinued operations:
Depreciation
 
$

 
$
705

Amortization of other intangible assets
 
$

 
$
564

Share-based compensation expense
 
$

 
$
226

Purchases of property, plant and equipment
 
$

 
$
385

Cash and cash equivalents, beginning of the period
 
$

 
$
3,659

Cash and cash equivalents, end of the period
 
$

 
$
1,911

 
The accompanying notes are an integral part of these condensed consolidated financial statements.

8

Table of Contents

LOGITECH INTERNATIONAL S.A.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(unaudited)
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
Accumulated
Other
 
Total
 
Registered Shares
 
Paid-in
 
Treasury Shares
 
Retained
 
Comprehensive
 
Shareholders’
 
Shares
 
Amount
 
Capital
 
Shares
 
Amount
 
Earnings
 
Income (Loss)
 
Equity
March 31, 2015
173,106

 
$
30,148

 
$

 
8,625

 
$
(88,951
)
 
$
930,174

 
$
(113,237
)
 
$
758,134

Total comprehensive income

 

 

 

 

 
7,437

 
(2,818
)
 
4,619

Tax effects from share-based awards

 

 
2,948

 

 

 

 

 
2,948

Sales of shares upon exercise of options

 

 
(1,651
)
 
(369
)
 
5,717

 

 

 
4,066

Issuance of shares upon vesting of restricted stock units

 

 
(3,754
)
 
(157
)
 
2,458

 

 

 
(1,296
)
Share-based compensation expense

 

 
6,761

 

 

 

 

 
6,761

Purchase of treasury shares

 

 

 
577

 
(8,814
)
 

 

 
(8,814
)
June 30, 2015
173,106

 
$
30,148

 
$
4,304

 
8,676

 
$
(89,590
)
 
$
937,611

 
$
(116,055
)
 
$
766,418

 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
Accumulated Other
 
Total
 
Registered Shares
 
Paid-in
 
Treasury Shares
 
Retained
 
Comprehensive
 
Shareholders’
 
Shares
 
Amount
 
Capital
 
Shares
 
Amount
 
Earnings
 
Income (Loss)
 
Equity
March 31, 2016
173,106

 
$
30,148

 
$
6,616

 
10,697

 
$
(128,407
)
 
$
963,576

 
$
(111,985
)
 
$
759,948

Total comprehensive income

 

 

 

 

 
21,941

 
2,152

 
24,093

Tax effects from share-based awards

 

 
(704
)
 

 

 

 

 
(704
)
Sales of shares upon exercise of options

 

 
206

 
(52
)
 
393

 

 

 
599

Issuance of shares upon vesting of restricted stock units

 

 
(14,709
)
 
(861
)
 
7,773

 
(2,249
)
 

 
(9,185
)
Share-based compensation expense

 

 
8,591

 

 

 

 

 
8,591

Purchases of treasury shares

 

 

 
1,590

 
(24,422
)
 

 

 
(24,422
)
June 30, 2016
173,106

 
$
30,148

 
$

 
11,374

 
$
(144,663
)
 
$
983,268

 
$
(109,833
)
 
$
758,920

 
The accompanying notes are an integral part of these condensed consolidated financial statements.


9

Table of Contents

LOGITECH INTERNATIONAL S.A.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1 — The Company and Summary of Significant Accounting Policies and Estimates

The Company
 
Logitech International S.A, together with its consolidated subsidiaries, ("Logitech" or the "Company") designs, manufactures and markets products that allow people to connect through music, gaming, video, computing, and other digital platforms.

The Company sells its products to a broad network of domestic and international customers, including direct sales to retailers and indirect sales through distributors.
Logitech was founded in Switzerland in 1981 and Logitech International S.A. has been the parent holding company of Logitech since 1988. Logitech International S.A. is a Swiss holding company with its registered office in Apples, Switzerland, which conducts its business through subsidiaries in Americas, Europe, Middle East, Africa ("EMEA") and Asia Pacific. Shares of Logitech International S.A. are listed on both the SIX Swiss Exchange under the trading symbol LOGN and the Nasdaq Global Select Market under the trading symbol LOGI.

Basis of Presentation
 
The condensed consolidated interim financial statements include the accounts of Logitech and its subsidiaries. All intercompany balances and transactions have been eliminated. The condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and therefore do not include all the information required by GAAP for complete financial statements. They should be read in conjunction with the Company’s audited consolidated financial statements for the fiscal year ended March 31, 2016, included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on May 23, 2016. 

In the opinion of management, these condensed consolidated financial statements include all adjustments, consisting of only normal and recurring adjustments, necessary and in all material aspects, for a fair statement of the results of operations, comprehensive income, financial position, cash flows and changes in shareholders' equity for the periods presented. Operating results for the three months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2017, or any future periods.
 
Reclassification

Certain amounts from the comparative period in the accompanying unaudited condensed consolidated financial statements have been reclassified to conform to the condensed consolidated financial statement presentation as of and for the three months ended June 30, 2016.

Changes in Significant Accounting Policies
 
There have been no substantial changes in the Company’s significant accounting policies during the three months ended June 30, 2016 compared with the significant accounting policies described in its Annual Report on Form 10-K for the fiscal year ended March 31, 2016.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Examples of significant estimates and assumptions made by management involve the fair value of goodwill, intangible assets acquired from business acquisitions, warranty liabilities, accruals for discretionary customer programs, sales return reserves, allowance for doubtful accounts, inventory valuation, restructuring charges, contingent consideration from business acquisitions, share-based compensation expense, uncertain tax positions, and valuation allowances for deferred tax assets. Although these estimates are based on management’s

10

Table of Contents

best knowledge of current events and actions that may impact the Company in the future, actual results could differ materially from those estimates.
 
Recent Accounting Pronouncements 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-9, "Revenue from Contracts with Customers (Topic 606)," ("ASU 2014-9"). ASU 2014-9 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 was originally to be effective for the Company on April 1, 2017. In July 2015, the FASB affirmed a one-year deferral of the effective date of the new revenue standard. The new standard will become effective for the Company on April 1, 2018. Early application is permitted but not before the original effective date of annual periods beginning after December 15, 2016. The new standard is required to be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method nor has it determined whether it will early adopt this guidance or the impact of the new standard on its condensed consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, "Simplifying the Measurement of Inventory (Topic 330)", ("ASU 2015-11"). Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. The amendments in ASU 2015-11 require an entity to measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective in the first quarter of fiscal year 2018 for the Company, with early adoption permitted. The Company does not expect to early adopt this guidance and does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements.

In January 2016, FASB issued ASU 2016-01 “Financial Instruments- Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10)”. The guidance is effective in the first quarter of fiscal year 2018 for the Company, with early adoption permitted. The Company does not expect to early adopt this guidance and does not believe that the adoption of this guidance will have a material impact on its condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02 "Leases (Topic 842)", which requires the recognition of lease assets and lease liabilities arising from operating leases in the statement of financial position. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the full effect that ASU 2016-02 will have on its condensed consolidated financial statements and will adopt the standard effective April 1, 2019.

In March 2016, the FASB issued ASU 2016-09 "Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting". The amendment simplifies several aspects of the accounting for share-based payments, including immediate recognition of all excess tax benefits and deficiencies in the income statement, changing the threshold to qualify for equity classification up to the employees' maximum statutory tax rates, allowing an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur, and clarifying the classification on the statement of cash flows for the excess tax benefit and employee taxes paid when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. The Company is evaluating the effect that ASU 2016-09 will have on its condensed consolidated financial statements and the timing of the adoption of this standard.

Note 2 — Discontinued operations

During the third quarter of fiscal year 2016, the Company's Board of Directors approved a plan to divest the Lifesize video conferencing business. Subsequently, on December 28, 2015 in the fourth quarter of fiscal year 2016, the Company and Lifesize, Inc.(“Lifesize”), a wholly owned subsidiary of the Company which held the assets of the Company’s video conferencing reportable segment, entered into a stock purchase agreement (the “Stock

11

Table of Contents

Purchase Agreement”) with entities affiliated with three venture capital firms - Redpoint Ventures, Sutter Hill Ventures and Meritech Capital Partners (the "Venture Investors"). Pursuant to the terms of the Stock Purchase Agreement, the Company sold 2.5 million shares of Series B Preferred Stock of Lifesize to the Venture Investors for cash proceeds of $2.5 million and retained 12 million non-voting shares of Series A Preferred Stock of Lifesize. The shares of Series A Preferred Stock of Lifesize retained by the Company represent 37.5% of the total shares outstanding immediately after the closing of the transactions (the "Closing"). Lifesize also issued 17.5 million shares of Series B Preferred Stock to the Venture Investors for cash proceeds of $17.5 million. The shares of Series B Preferred Stock held by the Venture Investors represent 62.5% of the total shares outstanding immediately after the Closing. In addition, Lifesize reserved 8 million shares of common stock for issuance pursuant to a stock plan to be adopted by Lifesize following the Closing (the “Employee Pool”), none of which are issued or outstanding at the Closing. The divestiture of the Lifesize video conferencing business was effective on December 28, 2015. The Stock Purchase Agreement contains representations, warranties and covenants of the parties and includes certain indemnification obligations of the Company to the Venture Investors. See “Note 12 - Commitments and Contingencies” for more information. The Stock Purchase Agreement also contains certain post-closing working capital adjustments. Post closing continuing involvement with the discontinued operations includes certain customary services and support which are expected to be provided to Lifesize during the transition period from December 28, 2015 until approximately the end of the third quarter of fiscal year 2017.

The Company has classified the results of its Lifesize video conferencing business as discontinued operations in its condensed consolidated statements of operations for all periods presented since the disposition of the Lifesize video conferencing business represents a strategic shift that has a major effect on the Company's operations and financial results. The retained Series A Preferred Stock gives the Company no voting rights or any other significant influence over the disposed Lifesize video conferencing business, and therefore is accounted for as a cost method investment which is initially recognized at fair value of $5.6 million at the date of disposition of the Lifesize video conferencing business.

Discontinued operations include results of the Lifesize video conferencing business. Discontinued operations also include other costs incurred by Logitech to effect the divestiture of the Lifesize video conferencing business. These costs include transaction charges, advisory and consulting fees and restructuring cost related to the Lifesize video conferencing business.

The following table presents financial results of the video conferencing segment classified as discontinued operations for the three months ended June 30, 2015 (in thousands):

 
Three Months Ended
June 30,

 
2015
Net sales
 
$
22,634

Cost of goods sold
 
8,838

Gross profit
 
13,796

Operating expenses:
 
 

Marketing and selling
 
11,631

Research and development
 
5,663

General and administrative
 
1,692

Restructuring charges, net
 
1,457

Total operating expenses
 
20,443

Operating loss from discontinued operations
 
(6,647
)
Interest expense and other expense, net
 
(93
)
Loss from discontinued operations before income taxes
 
(6,740
)
Benefit from income taxes
 
(1,317
)
Net loss from discontinued operations
 
$
(5,423
)


12

Table of Contents

Note 3 — Business Acquisition

On April 20, 2016 ("Acquisition Date"), the Company acquired all of the equity interest of JayBird, LLC (“Jaybird”), a Utah limited liability company that develops Bluetooth earbuds, activity trackers, and accessories for sports and active lifestyles, for a purchase price of $54.2 million, including a working capital adjustment and payment of line-of-credit on behalf of Jaybird, with an additional earn-out of up to $45.0 million based on the achievement of certain net revenue growth targets over approximately a two year period (the "Jaybird Acquisition"). If the net revenue growth targets are met, the Company will pay $25.0 million and $20.0 million in fiscal year 2018 and 2019, respectively. The acquisition is expected to accelerate Logitech’s entry into the wireless wearables space.

The Jaybird business meets the definition of a business and is accounted for using the acquisition method. The fair value of consideration transferred for the Jaybird Acquisition consisted of the following (in thousands):
 
Purchase price
 
$
54,242

Fair value of contingent consideration (earn-out)
 
18,000

Fair value of total consideration transferred
 
$
72,242


The fair value of the earn-out payments at the acquisition date was determined by providing risk adjusted earnings projections using a Monte Carlo Simulation, using inputs not observable in the market and therefore represents a Level 3 measurement. The fair value of this earn-out is discussed further in Note 8 - "Fair Value Measurements" to the condensed consolidated financial statements.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):
 
 
Estimated Fair Value
Cash and cash equivalents
 
$
255

Accounts receivable
 
272

Inventories
 
10,214

Other current assets
 
611

Property, plant, and equipment
 
1,165

Intangible assets
 
50,280

Other assets
 
27

Total identifiable assets acquired
 
62,824

Accounts payable
 
(10,513
)
Accrued liabilities
 
(1,227
)
Other current liabilities
 
(5,226
)
Other long-term liabilities
 
(283
)
Net identifiable assets acquired
 
$
45,575

Goodwill
 
26,667

Net assets acquired
 
$
72,242


The fair value of identifiable intangible assets acquired was based on estimates and assumptions made by the management at the time of acquisition. As additional information becomes available, such as finalization of the estimated fair value of the assets acquired and liabilities assumed and the fair value of contingent consideration, the Company may further revise its preliminary purchase price allocation during the remainder of the measurement period (which will not exceed 12 months from the Acquisition Date). Any such revisions or changes may be material as we finalize the fair values of the tangible and intangible assets acquired and liabilities assumed.

Goodwill is primarily attributable to the assembled workforce, and anticipated synergies expected to arise after the acquisition. Goodwill is expected to be deductible for tax purpose.

13

Table of Contents


Inventory is estimated at net realizable value, which uses the estimated selling prices, less the cost of disposal and a reasonable profit allowance for the selling efforts. Upon sales of the inventory, the difference between the fair value of the inventories and the amount recognized by the acquiree immediately before the acquisition date, which is $0.7 million, is recognized in "Amortization of intangibles assets and purchase accounting effect on inventories" in the condensed consolidated statements of operations.

The Company included Jaybird's estimated fair value of assets acquired and liabilities assumed in its condensed consolidated balance sheets beginning April 20, 2016. Pro forma results of operations for the Jaybird Acquisition have not been presented because they are not material to the condensed consolidated statements of operations. The results of operations for Jaybird has been included in the Company's condensed consolidated statements of operations from the acquisition date. Jaybird contributed $14.3 million net sales and $1.8 million operating loss, which includes $1.7 million amortization of intangible assets resulting from the acquisition and $0.7 million of purchase accounting effect on inventory.

The Company incurred acquisition-related costs of approximately $0.5 million during the three months ended June 30, 2016. The acquisition-related costs are included in "Amortization of intangible assets and acquisition related costs" in the operating expense of the condensed consolidated statements of operations.

The following table sets forth the components of identifiable intangible assets acquired at their preliminary estimated fair values and their estimated useful lives as of the date of acquisition (in thousands, except useful life):
 
Preliminary Fair Value
Estimated Useful Life (years)
Developed technology
$
18,450

4
In-process research & development ("IPR&D")
2,550

Not Applicable
Customer relationships
19,900

8
Trade name
9,380

6
Total intangible assets acquired
$
50,280

 

Except for IPR&D, intangible assets acquired as a result of the Jaybird acquisition are being amortized over their estimated useful lives using the straight-line method of amortization. Amortization of developed technology of $0.9 million during the three months ended June 30, 2016 is included in "Amortization of intangible assets and purchase accounting effect of inventory" in the gross profit of the condensed consolidated statements of operations. Amortization of the intangible asset of customer relationship and trade name of $0.8 million during the three months ended June 30, 2016 is included in "Amortization of intangible assets and acquisition related costs" in the operating expense of the condensed consolidated statements of operations.

Developed technology relates to existing bluetooth wireless sports earbuds. The economic useful life was determined based on the technology cycle related to developed technology of existing products, as well as the cash flows over the forecast period.

Customer relationships represent the fair value of future projected revenue that will be derived from sales of products to existing customers of Jaybird. The economic useful life was determined based on historical customer turnover rates and the industry benchmarks.

Trade name relates to the “Jaybird” trade name. The economic useful life was determined based on the expected life of the trade name and the cash flows anticipated over the forecasted periods.

The value of developed technology and trade names were estimated using the relief-from-royalty method, an income approach (Level 3), which estimates the cost savings that accrue to the owner of the intangibles asset that would otherwise be payable as royalties or license fees on revenues earned through the use of the asset. A royalty rate is applied to the projected revenues associated with the intangible asset to determine the amount of savings, which is then discounted to determine the fair value. The developed technology and trade names were valued using royalty rates of 10% and 2.5%, respectively, and both discounted at a rate of 16%.


14

Table of Contents

The value of customer relationships was estimated using the excess earnings method, an income approach (Level 3), which converts projected revenues and costs into cash flows. To reflect the fact that certain other assets contribute to the cash flows generated, the returns for these contributory assets were removed to arrive at estimated cash flows solely attributable to the customer relationships, which was discounted at a rate of 16%.

The IPR&D is accounted for as an indefinite-lived intangible asset and is not amortized until completion or abandonment of the associated research and development efforts. If the research and development efforts are completed, the IPR&D intangible asset will be amortized over the estimated useful lives to be determined as of the date the efforts are completed. IPR&D is tested for impairment annually or periodically if an indicator of impairment exists during the period until completion. The expected release date of the IPR&D is during fiscal year 2017 to fiscal year 2018.

The Company believes the amounts of purchased intangible assets recorded above represent the fair values of, and approximate the amounts a market participant would pay for, these intangible assets as of the Acquisition Date.

Note 4 — Net Income per Share
 
The computations of basic and diluted net income per share for the Company were as follows (in thousands, except per share amounts):
 
 
Three Months Ended
June 30,
 
 
2016
 
2015
Net Income (loss):
 
 
 
 
Continuing operations
 
$
21,941

 
$
12,860

Discontinued operations
 

 
(5,423
)
Net income
 
$
21,941

 
$
7,437

 
 
 
 
 
Shares used in net income (loss) per share computation:
 
 

 
 

Weighted average shares outstanding - basic
 
162,130

 
164,431

Effect of potentially dilutive equivalent shares
 
2,173

 
2,464

Weighted average shares outstanding - diluted
 
164,303

 
166,895

 
 
 
 
 
Net income (loss) per share - basic:
 
 

 
 

Continuing operations
 
$
0.14

 
$
0.08

Discontinued operations
 

 
(0.03
)
Net income per share - basic
 
$
0.14

 
$
0.05

 
 
 
 
 
Net income (loss) per share - diluted:
 
 
 
 
Continuing operations
 
$
0.13

 
$
0.08

Discontinued operations
 

 
(0.04
)
Net income per share - diluted
 
$
0.13

 
$
0.04

 
Share equivalents attributable to outstanding stock options and restricted stock units ("RSUs") of 5.7 million and 7.3 million for the three months ended June 30, 2016 and 2015, respectively, were anti-dilutive and excluded from the calculation of diluted net income per share.
 

15

Table of Contents

Note 5 — Employee Benefit Plans
 
Employee Share Purchase Plans and Stock Incentive Plans
 
As of June 30, 2016, the Company offers the 2006 ESPP (2006 Employee Share Purchase Plan (Non-U.S.)), the 1996 ESPP (1996 Employee Share Purchase Plan (U.S.)), the 2006 Plan (2006 Stock Incentive Plan) and the 2012 Plan (2012 Stock Inducement Equity Plan).

The following table summarizes the share-based compensation expense and related tax benefit recognized for the three months ended June 30, 2016 and 2015, excluding balances classified as discontinued operations (in thousands):
 
 
 
Three Months Ended
June 30,
 
 
 
2016
 
2015
Cost of goods sold
 
 
$
675

 
$
605

Marketing and selling
 
 
3,437

 
2,064

Research and development
 
 
914

 
673

General and administrative
 
 
3,491

 
3,174

Restructuring
 
 

 
7

Total share-based compensation expense
 
 
8,517

 
6,523

Income tax benefit
 
 
(1,815
)
 
(1,337
)
Total share-based compensation expense, net of income tax
 
 
$
6,702

 
$
5,186

 
As of June 30, 2016 and 2015, the Company capitalized $0.5 million and $0.5 million of stock-based compensation expenses as inventory, respectively.
 
Defined Benefit Plans
 
Certain of the Company’s subsidiaries sponsor defined benefit pension plans or non-retirement post-employment benefits covering substantially all of their employees. Benefits are provided based on employees’ years of service and earnings, or in accordance with applicable employee benefit regulations. The Company’s practice is to fund amounts sufficient to meet the requirements set forth in the applicable employee benefit and tax regulations. The cost recorded of $2.8 million and $2.9 million for the three months ended June 30, 2016 and 2015, respectively, was primarily related to service costs.
 
Note 6 — Income Taxes
 
The Company is incorporated in Switzerland but operates in various countries with differing tax laws and rates. Further, a portion of the Company’s income before taxes and the provision for (benefit from) income taxes are generated outside of Switzerland.
 
The income tax provision for the three months ended June 30, 2016 was $3.1 million based on an effective income tax rate of 12.2% of pre-tax income, compared to a nominal tax income benefit for the three months ended June 30, 2015

The change in the effective income tax rate for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, is due to the mix of income and losses in the various tax jurisdictions in which the Company operates. In the three months ended June 30, 2015, there was a discrete tax benefit of $2.2 million from the preferential income tax rate reduction pursuant to the High and New Technology Enterprise Program in China.

As of June 30 and March 31, 2016, the total amount of unrecognized tax benefits due to uncertain tax positions was $70.3 million and $69.9 million, respectively, all of which would affect the effective income tax rate if recognized.
 
The Company had $59.7 million in non-current income taxes payable and $0.1 million in current income taxes payable, including interest and penalties, related to our income tax liability for uncertain tax positions as of June 30 and March 31, 2016.

16

Table of Contents

 
The Company recognizes interest and penalties related to unrecognized tax positions in income tax expense. As of June 30 and March 31, 2016, the Company had $3.8 million and $3.6 million of accrued interest and penalties related to uncertain tax positions, respectively.
 
Although the Company has adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved. During fiscal year 2017, the Company will continue to review its tax positions and provide for or reverse unrecognized tax benefits as issues arise. During the next 12 months, it is reasonably possible that the amount of unrecognized tax benefits could increase or decrease significantly due to changes in tax law in various jurisdictions, new tax audits and changes in the U.S. dollar as compared to other currencies. Excluding these factors, uncertain tax positions may decrease by as much as $15.5 million from the lapse of the statutes of limitations in various jurisdictions during the next 12 months.

Note 7— Balance Sheet Components
 
The following table presents the components of certain balance sheet asset amounts as of June 30 and March 31, 2016 (in thousands): 
 
 
June 30,
2016
 
March 31,
2016
Accounts receivable, net:
 
 

 
 

Accounts receivable
 
$
372,634

 
$
332,553

Allowance for doubtful accounts
 
(677
)
 
(667
)
Allowance for sales returns
 
(19,856
)
 
(18,526
)
Allowance for cooperative marketing arrangements
 
(26,951
)
 
(28,157
)
Allowance for customer incentive programs*
 
(52,576
)
 
(60,872
)
Allowance for pricing programs
 
(80,332
)
 
(81,553
)
 
 
$
192,242

 
$
142,778

Inventories:
 
 

 
 

Raw materials
 
$
39,881

 
$
48,489

Finished goods
 
207,911

 
180,297

 
 
$
247,792

 
$
228,786

Other current assets:
 
 

 
 

Income tax and value-added tax receivables
 
$
21,368

 
$
22,572

Prepaid expenses and other assets
 
15,165

 
12,916

 
 
$
36,533

 
$
35,488

Property, plant and equipment, net:
 
 

 
 

Property, plant and equipment at cost
 
$
374,056

 
371,212

Less: accumulated depreciation and amortization
 
(287,012
)
 
(278,352
)
 
 
$
87,044

 
$
92,860

Other assets:
 
 

 
 

Deferred tax assets
 
$
56,245

 
$
56,208

Trading investments for deferred compensation plan
 
14,997

 
14,836

Investments held in privately held companies
 
9,567

 
9,247

Other assets
 
6,281

 
6,525

 
 
$
87,090

 
$
86,816


*The decrease in the allowances for customer incentive programs as of June 30, 2016 compared with March 31, 2016 was due to claim processing.





17

Table of Contents

The following table presents the components of certain balance sheet liability amounts as of June 30 and March 31, 2016 (in thousands): 
 
 
June 30,
2016
 
March 31,
2016
Accrued and other current liabilities:
 
 

 
 

Accrued personnel expenses
 
$
46,068

 
$
46,025

Indirect customer incentive programs
 
28,937

 
28,721

Warranty accrual
 
13,628

 
11,880

Employee benefit plan obligation
 
1,461

 
1,285

Income taxes payable
 
1,493

 
1,553

Other current liabilities
 
75,730

 
84,300

 
 
$
167,317

 
$
173,764

Non-current liabilities:
 
 

 
 

Warranty accrual
 
$
8,124

 
$
8,500

Obligation for deferred compensation plan
 
14,997

 
14,836

Employee benefit plan obligation
 
53,218

 
53,909

Deferred tax liability
 
1,665

 
1,665

Contingent consideration for business acquisition
 
18,000

 

Other non-current liabilities
 
10,329

 
10,625

 
 
$
106,333

 
$
89,535


 
Note 8— Fair Value Measurements
 
Fair Value Measurements
 
The Company considers fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. The Company utilizes the following three-level fair value hierarchy to establish the priorities of the inputs used to measure fair value:
 
Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
Level 2 — Observable inputs other than quoted market prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
 
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.


18

Table of Contents

The following table presents the Company’s financial assets and liabilities, that were accounted for at fair value on a recurring basis, excluding assets related to the Company’s defined benefit pension plans, classified by the level within the fair value hierarchy (in thousands): 
 
 
June 30, 2016
 
March 31, 2016
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 
 
 
 
 

 
 

 
 

Cash equivalents
 
$
60,000

 
$

 
$

 
$
10,000

 
$

 
$

 
 
 

 
 

 
 

 
 

 
 

 
 

Trading investments for deferred compensation plan:
 
 

 
 
 
 
 
 

 
 

 
 

Money market funds
 
$
35

 
$

 
$

 
$
3,467

 
$

 
$

Mutual funds
 
14,962

 

 

 
11,369

 

 

Total of trading investments for deferred compensation plan
 
$
14,997

 
$

 
$

 
$
14,836

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange derivative assets
 
$

 
$
186

 
$

 
$

 
$
10

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related contingent consideration
 
$

 
$

 
$
18,000

 
$

 
$

 
$

Foreign exchange derivative liabilities
 
$

 
$
231

 
$

 
$

 
$
1,132

 
$

 
Investment Securities
 
The marketable securities for the Company's deferred compensation plan are recorded at a fair value of $15.0 million and $14.8 million as of June 30, 2016 and March 31, 2016, respectively, based on quoted market prices. Quoted market prices are observable inputs that are classified as Level 1 within the fair value hierarchy. Unrealized trading gains / (losses) related to trading securities for the three months ended June 30, 2016 and 2015 were not significant and are included in other expense, net.

Acquisition-related contingent consideration

The acquisition-related contingent consideration liability arising from the Jaybird Acquisition (see "Note 3 - Business Acquisition") represents the future potential earn-out payments of up to $45 million based on the achievement of certain net revenue growth targets over approximately a two year period. If the net revenue growth targets are met, the Company will pay $25 million and $20 million in fiscal year 2018 and 2019, respectively. The fair value of the earn-out was determined by using a Monte Carlo Simulation that includes significant unobservable inputs such a risk adjusted discount rate of 16% and projected revenues of Jaybird over the earn-out period. The fair-value of the earn-out at the acquisition date of $18 million was recorded by the Company as of the Acquisition Date. The fair value of the contingent consideration is calculated on a quarterly basis. There was no change in the fair-value during the quarterly period ended June 30, 2016.
 
Assets Measured at Fair Value on a Nonrecurring Basis

The Company’s non-marketable cost method investments, and non-financial assets, such as goodwill, intangible assets and property, plant and equipment, are recorded at fair value only upon initial recognition or if an impairment is recognized. There were no impairments of long-lived assets during the three months ended June 30, 2016 or 2015.

Non-marketable cost method investments. These investments are classified as Level 3 due to the absence of quoted market prices, the inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require management's judgment. When certain events or circumstances indicate that impairment may exist, the Company revalues the investments using various assumptions, including the financial metrics and ratios of comparable public companies.


19

Table of Contents

Included in non-marketable investments primarily is the Company’s investment in Series A Preferred Stock of Lifesize recorded at the fair value of $5.6 million on the date of the Lifesize divestiture.
 
The aggregate recorded amount of cost method investments included in other assets at June 30, 2016 and March 31, 2016 was $7.4 million and $7.4 million, respectively.

Note 9 - Derivative Financial Instruments
 
Under certain agreements with the respective counterparties to the Company’s derivative contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, the Company presents its derivative assets and derivative liabilities on a gross basis on the condensed consolidated balance sheets as of June 30, 2016 and March 31, 2016.

The fair values of the Company’s derivative instruments not designated as hedging instruments were not material as of June 30, 2016 or March 31, 2016. The following table presents the fair values of the Company’s derivative instruments designated as hedging instruments on a gross basis in other current assets or accrued and other current liabilities on its condensed consolidated balance sheets as of June 30, 2016 and March 31, 2016 (in thousands):
 
 
Derivatives
 
 
Asset
 
Liability
 
 
June 30,
2016
 
March 31,
2016
 
June 30,
2016
 
March 31,
2016
Cash flow hedges
 
$
186

 
$
10

 
$

 
$
1,038

 
The amount of gain (loss) recognized on derivatives not designated as hedging instruments were not material in all periods presented herein. The following table presents the amounts of gains (losses) on the Company’s derivative instruments designated as hedging instruments and their locations on its condensed consolidated statements of operations and condensed consolidated statements of comprehensive income for the three months ended June 30, 2016 and 2015 (in thousands):

 
 
Three Months Ended
June 30,
 
 
Amount of Gain (Loss)
Deferred as a Component of Accumulated
Other Comprehensive Loss After Reclassification to Costs of Goods Sold
 
Amount of Loss (Gain)
Reclassified from Accumulated Other Comprehensive Loss to
Costs of Goods Sold
 
 
2016
 
2015
 
2016
 
2015
Cash flow hedges
 
$
1,705

 
$
(4,722
)
 
$
740

 
$
(2,460
)

 
Cash Flow Hedges
 
The Company enters into currency exchange forward contracts to hedge against exposure to changes in currency exchange rates related to its subsidiaries’ forecasted inventory purchases. The Company has one entity with a euro functional currency that purchases inventory in U.S. Dollars. The primary risk managed by using derivative instruments is the currency exchange rate risk. However, there can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in currency exchange rates. The Company has designated these derivatives as cash flow hedges. These hedging contracts mature within four months, and are denominated in the same currency as the underlying transactions. Gains and losses in the fair value of the effective portion of the hedges are deferred as a component of accumulated other comprehensive loss until the hedged inventory purchases are sold, at which time the gains or losses are reclassified to cost of goods sold. The Company assesses the effectiveness of the hedges by comparing changes in the spot rate of the currency underlying the forward contract with changes in the spot rate of the currency in which the forecasted transaction will be consummated. If the underlying transaction being hedged fails to occur or if a portion of the hedge does not generate offsetting changes in the currency exposure of forecasted inventory purchases, the Company immediately recognizes the gain or loss on the associated financial instrument in other expense, net.

20

Table of Contents

Such gains and losses were not material during the three months ended June 30, 2016 and 2015. Cash flows from such hedges are classified as operating activities in the condensed consolidated statements of cash flows. The notional amounts of currency exchange forward contracts outstanding related to forecasted inventory purchases were $64.6 million and $39.8 million at June 30, 2016 and March 31, 2016, respectively. The Company estimates that $0.1 million of net gains related to its cash flow hedges included in accumulated other comprehensive loss as of June 30, 2016 will be reclassified into earnings within the next 12 months.
 
Other Derivatives
 
The Company also enters into currency exchange forward and swap contracts to reduce the short-term effects of currency exchange rate fluctuations on certain foreign currency receivables or payables. These contracts generally mature within one month. The primary risk managed by using forward and swap contracts is the currency exchange rate risk. The gains or losses on currency exchange contracts are recognized in other expense, net based on the changes in fair value.
 
The notional amounts of currency exchange forward and swap contracts outstanding as of June 30 and March 31, 2016 relating to foreign currency receivables or payables were $50.6 million and $63.7 million, respectively. Open forward and swap contracts outstanding at June 30, 2016 and March 31, 2016 consisted of contracts in Mexican Pesos, Japanese Yen, British Pounds, Taiwanese Dollars and Australian Dollars to be settled at future dates at pre-determined exchange rates.
 
The fair value of all currency exchange forward and swap contracts is determined based on observable market transactions of spot currency rates and forward rates. Cash flows from these contracts are classified as operating activities in the condensed consolidated statements of cash flows.

Note 10 — Goodwill and Other Intangible Assets
  
The Company conducts its impairment analysis of the goodwill annually at December 31 and as necessary if changes in facts and circumstances indicate that it is more likely than not that the fair value of the Company’s reporting units may be less than its carrying amount. There have been no events or circumstances during the three months ended June 30, 2016 that have required the Company to perform an interim assessment of goodwill.
 
The following table summarizes the activity in the Company’s goodwill balance during the three months ended June 30, 2016 (in thousands):
As of March 31, 2016
 
$
218,224

Business acquisition (See Note 3)
 
26,667

Currency impact
 
(11
)
As of June 30, 2016
 
$
244,880


Other Intangible Assets

Amortization expense for other intangible assets was $1.7 million and $0.2 million for the three months ended June 30, 2016 and 2015, respectively.
 
Note 11 — Financing Arrangements
 
The Company had several uncommitted, unsecured bank lines of credit aggregating $44.6 million as of June 30, 2016. There are no financial covenants under these lines of credit with which the Company must comply. As of June 30, 2016, the Company had outstanding bank guarantees of $15.6 million under these lines of credit. There was no borrowing outstanding under these lines of credit as of June 30, 2016 or March 31, 2016.


21

Table of Contents

Note 12 — Commitments and Contingencies
 
Product Warranties
 
All of the Company’s peripherals products sold are covered by warranty to be free from defects in material and workmanship.  For products launched prior to April 1, 2014, the standard warranty period was up to five years. Starting from April 1, 2014, the standard warranty for all new products launched was changed to two years from date of purchase for European Countries and generally one year from date of purchase for all other countries. At the time of sale, the Company accrues a warranty liability for estimated costs to provide products, parts or services to repair or replace products in satisfaction of the warranty obligation. The Company’s estimate of costs to fulfill its warranty obligations is based on historical experience and expectations of future conditions. When the Company experiences changes in warranty claim activity or costs associated with fulfilling those claims, the warranty liability is adjusted accordingly.
 
Changes in the Company’s warranty liability for the three months ended June 30, 2016 and 2015 were as follows (in thousands): 
 
Three Months Ended
June 30,
 
2016
 
2015
Beginning of the period
$
20,380

 
$
21,710

Assumed from business acquisition
1,813

 

Provision
3,177

 
1,913

Settlements
(3,428
)
 
(2,568
)
Currency impact
(190
)
 
229

End of the period
$
21,752

 
$
21,284

 
Other Contingencies
 
In April 2016, the Company entered into a settlement with the Securities and Exchange Commission (“SEC”) related to the accounting for Revue inventory valuation reserves that resulted in the restatement described in the Fiscal Year 2014 Annual Report on Form 10-K, revision to its consolidated financial statements concerning warranty accruals and amortization of intangible assets presented in its Amended Annual Report on Form 10-K/A, filed on August 7, 2013, and its transactions with a distributor for Fiscal Year 2007 through Fiscal Year 2009. The Company entered into the settlement without admitting or denying the findings of the SEC’s investigation and paid a civil penalty of $7.5 million. This amount was paid in April 2016.
 
Guarantees
 
Logitech Europe S.A. guaranteed payments of certain third-party contract manufacturers’ purchase obligations. As of June 30, 2016, the maximum amount of this guarantee was $3.8 million, of which $1.3 million of guaranteed purchase obligations were outstanding.

Indemnifications
 
The Company indemnifies certain of its suppliers and customers for losses arising from matters such as intellectual property disputes and product safety defects, subject to certain restrictions. The scope of these indemnities varies, but in some instances, includes indemnification for damages and expenses, including reasonable attorneys’ fees. As of June 30, 2016, no amounts have been accrued for these indemnification provisions. The Company does not believe, based on historical experience and information currently available, that it is probable that any material amounts will be required to be paid under its indemnification arrangements.
 
The Company also indemnifies its current and former directors and certain of its current and former officers. Certain costs incurred for providing such indemnification may be recoverable under various insurance policies. The Company is unable to reasonably estimate the maximum amount that could be payable under these arrangements because these exposures are not limited, the obligations are conditional in nature and the facts and circumstances involved in any situation that might arise are variable.


22

Table of Contents

The Stock Purchase Agreement in connection with the investment by three venture capital firms in Lifesize, Inc. contains representations, warranties and covenants of Logitech and Lifesize, Inc. to the Investors. Logitech has agreed, subject to certain limitations, to indemnify the Investors and certain persons related to the Investors for certain losses resulting from breaches of or inaccuracies in such representations, warranties and covenants as well as certain other obligations, including third-party expenses, restructuring costs and pre-closing tax obligations of Lifesize.
 
Legal Proceedings
 
From time to time the Company is involved in claims and legal proceedings that arise in the ordinary course of its business. The Company is currently subject to several such claims and a small number of legal proceedings. The Company believes that these matters lack merit and intends to vigorously defend against them. Based on currently available information, the Company does not believe that resolution of pending matters will have a material adverse effect on its financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that the Company’s defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on the Company’s business, financial condition, cash flows or results of operations in a particular period. Any claims or proceedings against the Company, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. Any failure to obtain necessary license or other rights, or litigation arising out of intellectual property claims, could adversely affect the Company’s business.

Note 13 — Shareholders’ Equity
 
Share Repurchase Program

In March 2014, the Company’s Board of Directors approved the 2014 share buyback program, which authorizes the Company to use up to $250.0 million to purchase its own shares. The Company’s share buyback program is expected to remain in effect for a period of three years. Shares may be repurchased from time to time on the open market, through block trades or trading plan or otherwise. Purchases may be started or stopped at any time without prior notice depending on market conditions and other factors. During the three months ended June 30, 2016 and 2015, 1.6 million and 0.6 million shares were repurchased for $24.4 million and $8.8 million, respectively.
 
Accumulated Other Comprehensive Loss
 
On total company basis, the components of accumulated other comprehensive income (loss) was as follows (in thousands):
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
Cumulative
Translation
Adjustment (1)
 
Defined
Benefit
Plan (1)
 
Deferred
Hedging
Gains (Losses)
 
Total
March 31, 2016
 
$
(84,038
)
 
$
(26,171
)
 
$
(1,776
)
 
$
(111,985
)
Other comprehensive income (loss)
 
(296
)
 
743

 
1,705

 
2,152

June 30, 2016
 
$
(84,334
)
 
$
(25,428
)
 
$
(71
)
 
$
(109,833
)
 
(1)        Tax effect was not significant as of June 30 or March 31, 2016.
 
Note 14 — Segment Information
 
The Company has determined that it operates in a single operating segment that encompasses the design, manufacturing and marketing of peripherals for PCs, tablets and other digital platforms. Operating performance measures are provided directly to the Company's Chief Executive Officer (“CEO”), who is considered to be the Company’s Chief Operating Decision Maker (“CODM”). The CEO periodically reviews information such as net sales and operating income (loss) to make business decisions. These operating performance measures do not include restructuring charges, net, share-based compensation expense and amortization of intangible assets, and the charges (credits) from purchase accounting effect.


23

Table of Contents

Net sales by product categories and sales channels, excluding intercompany transactions, for the three months ended June 30, 2016 and 2015 were as follows (in thousands):
 
 
Three Months Ended
June 30,
 
 
2016
 
2015
Mobile Speakers
 
$
57,296

 
$
40,544

Audio-PC & Wearables
 
56,579

 
45,699

Gaming
 
56,500

 
43,670

Video Collaboration
 
23,910

 
21,176

Home Control
 
11,167

 
10,254

Pointing Devices
 
116,783

 
116,985

Keyboards & Combos
 
118,019

 
105,829

Tablet & Other Accessories
 
13,885

 
18,809

PC Webcams
 
25,262

 
21,681

Other (1)
 
463

 
741

Total net retail sales
 
479,864

 
425,388

OEM
 

 
22,298

Total net sales
 
$
479,864

 
$
447,686


(1)
Other category includes products that the Company currently intends to transition out of, or has already transitioned out of, because they are no longer strategic to the Company's business.

Net sales to unaffiliated customers by geographic region (based on the customers’ location) for the three months ended June 30, 2016 and 2015 were as follows (in thousands):
 
 
Three Months Ended
June 30,
 
 
2016
 
2015
Americas
 
$
222,625

 
$
215,675

EMEA
 
142,922

 
119,612

Asia Pacific
 
114,317

 
112,399

Total net sales
 
$
479,864

 
$
447,686

 
Sales are attributed to countries on the basis of the customers’ locations. The United States represented 41% and 42% of the Company’s total consolidated net sales from continuing operations for the three months ended June 30, 2016 and 2015, respectively. No other single country represented more than 10% of the Company's total consolidated net sales during those periods. One customer group of the Company represented 13% and 14% of total consolidated net sales from continuing operations for the three months ended June 30, 2016 and 2015, respectively. Another customer group of the Company represented 12% of sales for the three months ended June 30, 2016.

Revenues from sales to customers in Switzerland, the Company’s home domicile, represented 2% of the Company’s total consolidated net sales from continuing operations for all the periods presented herein.
 
Long-lived assets by geographic region were as follows (in thousands):
 
 
June 30,
2016
 
March 31,
2016
Americas
 
$
40,883

 
$
40,221

EMEA
 
3,017

 
3,194

Asia Pacific
 
43,144

 
49,445

 
 
$
87,044

 
$
92,860

 
Long-lived assets in the United States and China were $38.1 million and $38.1 million as of June 30, 2016, respectively, and $40.0 million and $44.5 million at March 31, 2016, respectively. No other countries represented

24

Table of Contents

more than 10% of the Company’s total consolidated long-lived assets as of June 30 or March 31, 2016. Long-lived assets in Switzerland, the Company’s home domicile, were $1.5 million and $1.7 million at June 30 and March 31, 2016, respectively.
 
Note 15 — Restructuring

During the first quarter of fiscal year 2016, the Company implemented a restructuring plan to exit the OEM business, reorganize Lifesize to sharpen its focus on its cloud-based offering, and streamline the Company's overall cost structure through product, overhead and infrastructure cost reductions with a targeted resource realignment. Restructuring charges (credits) incurred during the three months ended June 30, 2016 under this plan primarily consisted of severance and other ongoing and one-time termination benefits. Charges and other costs related to the workforce reduction and structure realignment are presented as restructuring charges in the condensed consolidated statements of operations. On a total company basis, including the Lifesize video conferencing business as reported in discontinued operations, the Company has incurred approximately $25.4 million under this restructuring plan, including approximately $24.3 million for cash severance and other personnel costs. The Company substantially completed this restructuring plan by the fourth quarter of fiscal year 2016.

The following tables summarize restructuring related activities during the three months ended June 30, 2016:
 
 
Restructuring
 
 
Termination
Benefits
 
Lease Exit
Costs
 
Total
Accrual balance at March 31, 2016
 
$
6,275

 
$
125

 
$
6,400

Credits, net
 
(85
)
 

 
(85
)
Cash payments
 
(1,908
)
 
(125
)
 
(2,033
)
Accrual balance at June 30, 2016
 
$
4,282

 
$

 
$
4,282








25

Table of Contents

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion in conjunction with the interim unaudited condensed consolidated financial statements and related notes.
 
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include, among other things, statements regarding our strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance, and market position, our business strategy, the impact of investment prioritization decisions, product offerings, sales and marketing initiatives, strategic investments, addressing execution challenges, trends in consumer demand affecting our products and markets, trends in the composition of our customer base, our current or future revenue and revenue mix by product, among our lower- and higher-margin products, our new product introductions and by geographic region, our expectations regarding the potential growth opportunities for our products in mature and emerging markets and the enterprise market, our expectations regarding economic conditions in international markets, including China, Russia and Ukraine, our expectations regarding trends in global economic conditions and consumer demand for PCs and mobile devices, tablets, gaming, audio, pointing devices, wearables, remotes and other accessories and computer devices and the interoperability of our products with such third party platforms, our expectations regarding the convergence of markets for computing devices and consumer electronics, our expectations regarding the growth of cloud-based services, our expected reduction in size of our product portfolio and dependence on new products, our competitive position and the effect of pricing, product, marketing and other initiatives by us and our competitors, the potential that our new products will overlap with our current products, our expectations regarding competition from well-established consumer electronics companies in existing and new markets, our expectations regarding the recoverability of our goodwill, goodwill impairment charge estimates and the potential for future impairment charges, the impact of our current and proposed product divestitures, changes in our planned divestitures, and the timing thereof, significant fluctuations in currency exchange rates and commodity prices, the impact of new product introductions and product innovation on future performance or anticipated costs and expenses and the timing thereof, cash flows, the sufficiency of our cash and cash equivalents, cash generated and available borrowings (including the availability of our uncommitted lines of credit) to fund future cash requirements, our expectations regarding future sales compared to actual sales, our expectations regarding share repurchases, dividend payments and share cancellations, our expectations regarding our future working capital requirements and our anticipated capital expenditures needed to support our product development and expanded operations, our expectations regarding our future tax benefits and the adequacy of our provisions for uncertain tax positions, our expectations regarding our potential indemnification obligations, and the outcome of pending or future legal proceedings and tax audits, our belief that our disclosure controls and procedures are effective at the reasonable assurance level, our expectations regarding the impact of new accounting pronouncements on our operating results, and our ability to achieve and sustain renewed growth, profitability and future success. Forward-looking statements also include, among others, those statements including the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,”, "seek", “should,” “will,” and similar language. These forward-looking statements involve risks and uncertainties that could cause our actual performance to differ materially from that anticipated in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” in Part II, Item 1A of this quarterly report on Form 10-Q. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
 
Overview of Our Company
 
Logitech is a world leader in designing products that have an every day place in people's lives, connecting them to the digital experiences they care about. Over 30 years ago we started connecting people through computers, and now we are designing products that bring people together through music, gaming, video and computing.

We design, manufacture and market products that allow people to connect through music, gaming, video, computing, and other digital platforms. Our products participate in five large markets that all have growth potential:


26

Table of Contents

Music:  This market is comprised of both wired and wireless devices that capitalize on the rapid growth of streaming music. Products in this category include mobile speakers, audio-PC & wearables, and headsets connecting to all music services used on both PCs and mobile devices.

Gaming:  The Gaming market includes products designed for PCs and gaming consoles as well as devices designed to deliver new gaming experiences such as virtual and augmented reality. The rapid rise of eSports, and the promise of new implementations in virtual and augmented reality present growth opportunities in this market. Our products in Gaming include mice and keyboards, headsets, gamepads and steering wheels.

Video Collaboration:  Video Collaboration is focused on delivering solutions that enable real-time video, audio and content sharing capability to businesses and individuals. With the rapid adoption of cloud-based solutions that can lower the cost of adoption, our devices and solutions enable the rapid deployment of these cloud-based services through our platform agnostic, easy-to-use end points and peripherals.

Home:  The connected home is a market in its early stages of formation and growth. The push to realize the vision of the Internet-of-Things is delivering more and more connected devices that populate our homes, from the more traditionally connected devices like set-top boxes and digital entertainment devices to things like appliances, lighting, door locks and thermostats. We have a foundation for growth in this market through the entertainment control capabilities in our Harmony products.

Creativity and Productivity: This market is defined by products that enhance the users’ experiences associated with computing platforms. With ever increasing connectivity globally and the consistent growth in time spent by people on these computing platforms, we believe there are meaningful growth opportunities for our products. Our continued innovation in navigation, input and content creation on these platforms can drive growth in this market despite the secular decline of new PC sales. Pointing Devices, Keyboards & Combos, Tablet & Other Accessories, and PC Webcams comprise our product categories that address this market.

We sell our products to a broad network of domestic and international customers, including direct sales to retailers, e-tailers, and indirect sales through distributors. Our worldwide retail network includes consumer electronics distributors, retailers, mass merchandisers, specialty electronics stores, computer and telecommunications stores, value-added resellers and online merchants.

We seek to fulfill the increasing demand for interfaces between people and the expanding digital world across multiple platforms and user environments. The interface evolves as platforms, user models and our target markets evolve. As access to digital information has expanded, we have extended our focus to mobile devices, the digital home, and the digital world. All of these platforms require interfaces that are customized according to how the devices are used. We believe that continued investment in product research and development is critical to creating the innovation required to strengthen our competitive advantage and to drive future sales growth. We are committed to identifying and meeting current and future consumer trends with new and improved product technologies, as well as leveraging the value of the Logitech brand from a competitive, channel partner, and consumer experience perspective.

We believe that innovation, design and product quality are important to gaining market acceptance and maintaining market leadership.

From time to time, we may seek to partner with, or acquire when appropriate, companies that have products, personnel, and technologies that complement our strategic direction. We continually review our product offerings and our strategic direction in light of our profitability targets, competitive conditions, changing consumer trends and the evolving nature of the interface between the consumer and the digital world.

In fiscal years prior to fiscal year 2016, we had two segments: Peripherals, including retail and OEM products; and Lifesize Video Conferencing. During fiscal year 2016, we divested the Lifesize Video Conferencing segment, and exited the OEM business. Our financial results treat the Lifesize segment as discontinued operations for all the periods presented in this Quarterly Report on Form 10-Q. Unless indicated otherwise, the information included in Item 2 relates to our continuing operations and historical financial information has been recast to conform to this presentation within our condensed consolidated financial statements.


27

Table of Contents

On April 20, 2016, we acquired Jaybird for a purchase price of $54.2 million, including a working capital adjustment and payment of line-of-credit on behalf of Jaybird, along with an additional earn-out of up to $45 million based on achievement of growth targets over two years. Jaybird is a leader in wireless audio wearables for sports and active lifestyles, and the acquisition of Jaybird expands our long-term growth potential in our Music market.

Summary of Financial Results

Our net sales for the three months ended June 30, 2016 increased 7% compared to the three months ended June 30 2015, due to stronger retail sales, partially offset by the exit of OEM business in the quarter ended December 31, 2015.

Our retail sales for the three months ended June 30, 2016 increased 13% compared to the three months ended June 30, 2015. Retail sales increased 7%24% and 12% in the Americas ("AMR"), EMEA and Asia Pacific, respectively.

Our gross margin for the three months ended June 30, 2016 decreased to 35.1% from 35.3% for the three months ended June 30, 2015. The decrease in gross margin is primarily driven by the unfavorable fluctuations in currency exchange rates, amortization of intangibles and purchase accounting effect on inventories from the Jaybird Acquisition, partially offset by the exit of the OEM business, product cost reductions, and savings from supply chain efficiency.

Operating expenses for the three months ended June 30, 2016 were 29.8% of net sales, compared to 32.2% in the same period of the prior fiscal year. The decrease was primarily due to decrease in restructuring charges and cost savings, partially offset by amortization of intangibles and acquisition-related costs from the business combination during the current period, and unfavorable fluctuations in currency exchange rates.

The results of operations for Jaybird has been included in our condensed consolidated statements of operations from the acquisition date. Jaybird contributed $14.3 million net sales and $1.8 million operating loss, which includes $1.7 million amortization of intangible assets resulting from the acquisition and $0.7 million of purchase accounting effect on inventory.

Net income from continuing operations for the three months ended June 30, 2016 was $21.9 million, compared to $12.9 million for the three months ended June 30, 2015.

Given our global sales presence and the reporting of our financial results in U.S. Dollars, our financial results in fiscal year 2017 and 2016 have been affected by significant shifts in currency exchange rates. See “Results of Operations” for information on the effect of currency exchange results on our net sales. If the U.S. Dollar remains at its current strong levels in comparison to other currencies, this will affect our results of operations in future periods as well.
 
Trends in Our Business
 
Our strategy focuses on five large multi-category markets, including Music, Gaming, Video Collaboration, Home and Creativity & Productivity. We see opportunities to deliver growth in all these markets.

We believe our future growth will be determined by our ability to rapidly create innovative products across multiple digital platforms, including gaming and digital music devices. The following discussion represents key trends specific to our market opportunities.
Trends Specific to Our Five Market Opportunities
Music: The music market grew during the first quarter of fiscal year 2017, driven by growing consumption of music through mobile devices such as smartphones and tablets. This market growth, together with our investments in the UE brand, our introduction of new products and our ability to gain market share, has driven our growth in this market.

Gaming: The PC Gaming platform continues to show strong growth as online gaming and multi-platform experiences gain greater popularity and gaming content becomes increasingly more demanding. We believe Logitech is well positioned to benefit from the gaming market growth.

28

Table of Contents


Video Collaboration:  We continue to focus our efforts on creating and selling innovative products, including Video Collaboration products, to accommodate the increasing demand from medium-sized meeting rooms to small-sized rooms such as huddle rooms. During fiscal year 2016, we launched Logitech Group, a transformation in team collaboration that provides high-quality HD video conferencing for groups of up to 20 people and works with the video conferencing applications already in use. We will continue to invest in selected business specific products, targeted product marketing and sales channel development.

Home: This market increased in fiscal year 2016 and continued growing in fiscal year 2017.

Creativity & Productivity: Although new PC shipments continue to decline, the installed base of PC users is large. We believe that innovative PC peripherals, such as our mice and keyboards, can renew the PC usage experience, providing growth opportunities. Smaller mobile computing devices, such as tablets with touch interfaces, have created new markets and usage models for peripherals and accessories. We offer a number of products to enhance the use of mobile devices, including keyboard folios for the iPad and iPad mini, and keyboard covers and folios for the iPad Air. However, we have seen the market decline for the iPad platform, which has impacted the sales of our tablet accessories.
Business Application Suite:
In fiscal year 2016, we upgraded our worldwide business application suite from Oracle version 11i to Oracle version R12. As a result, during fiscal year 2016 this upgrade created delays in our processing of customer claims related to cooperative marketing arrangements, direct and indirect customer incentive programs and pricing programs that resulted in higher accruals and allowances for such programs. We have been working to enhance the operational efficiency of the claims processing module in our worldwide business application suite which thus far has yielded positive results.
Business Seasonality and Product Introductions
We have historically experienced higher net sales in our third fiscal quarter ending December 31, compared to other fiscal quarters in our fiscal year, due in part to seasonal holiday demand. Additionally, new product introductions can significantly impact net sales, product costs and operating expenses. Product introductions can also impact our net sales to our distribution channels as these channels are filled with new product inventory following a product introduction, and often channel inventory of an earlier model product declines as the next related major product launch approaches. Net sales can also be affected when consumers and distributors anticipate a product introduction. However, neither historical seasonal patterns nor historical patterns of product introductions should be considered reliable indicators of our future pattern of product introductions, future net sales or financial performance.

Critical Accounting Estimates

 The preparation of financial statements and related disclosures in conformity with U.S. GAAP (Generally Accepted Accounting Principles in the United States of America) requires us to make judgments, estimates and assumptions that affect reported amounts of assets, liabilities, goodwill and intangible assets from business acquisitions, net sales and expenses, contingent consideration, and the disclosure of contingent assets and liabilities.

We consider an accounting estimate critical if it: (i) requires management to make judgments and estimates about matters that are inherently uncertain; and (ii) is important to an understanding of our financial condition and operating results.

We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Although these estimates are based on management's best knowledge of current events and actions that may impact us in the future, actual results could differ from those estimates. Management has discussed the development, selection and disclosure of these critical accounting estimates with the Audit Committee of the Board of Directors.

Accounting for business combinations requires us to make significant estimates and assumptions, especially at the acquisition date with respect to tangible and intangible assets acquired and liabilities assumed and pre-

29

Table of Contents

acquisition contingencies. We use our best estimates and assumptions to accurately assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date.
Examples of critical estimates in valuing certain intangible assets and goodwill we have acquired include but are not limited to:
royalty rate range and forecasted revenue growth rate assumptions;

assumption regarding the estimated useful life of the acquired intangible;

discount rates

Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

The economic useful life of the developed technology from the Jaybird Acquisition was determined based on the technology cycle related to developed technology of existing products, as well as the cash flows over the forecast period.

The economic useful life of the customer relationships from the Jaybird Acquisition was determined based on historical customer turnover rates and the industry benchmarks.

The economic useful life of the trade name from the Jaybird Acquisition was determined based on the expected life of the trade name and the cash flows anticipated over the forecasted periods.

The acquisition-related contingent consideration liability arising from the Jaybird Acquisition (see "Note 3 - Business Acquisition) represents the future potential earn-out payments of up to $45 million based on the achievement of certain net revenue growth targets over approximately a two year period. If the net revenue growth targets are met, the Company will pay $25 million and $20 million in fiscal year 2018 and 2019, respectively. The fair value of the earn-out was determined by using a Monte Carlo Simulation that includes significant unobservable inputs such a risk adjusted discount rate of 16% and projected revenues of Jaybird over the earn-out period. The fair-value of the earn-out at the acquisition date of $18 million was recorded by the Company as of the acquisition date. The fair value of the contingent consideration is calculated on a quarterly basis. There was no change in the fair-value during the quarterly period ended June 30, 2016.

There have been no other new or material changes to the critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016 that are of significance, or potential significance to the Company.

Impact of Constant Currency

We refer to our net sales excluding the impact of currency exchange rate fluctuations as "constant dollar" sales. Percentage of constant dollar sales growth is calculated by translating prior period sales in each local currency at the current period’s average exchange rate for that currency and comparing that to current period sales.
Results of Operations
 Net Sales
 Net sales by channel for the three months ended June 30, 2016 and 2015 were as follows (Dollars in thousands):
 
 
Three Months Ended
June 30,
 
 
2016
 
2015
 
Change
Retail
 
$
479,864

 
$
425,388

 
13
 %
OEM
 

 
22,298

 
(100
)
Total net sales
 
$
479,864

 
$
447,686

 
7


30

Table of Contents

 Retail:
 Our net retail sales in the three months ended June 30, 2016 increased 13% compared to the same period of the prior fiscal year. Sales increased across all regions during the three months ended June 30, 2016. If currency exchange rates had been constant in the three months ended June 30, 2016 and 2015, our constant dollar retail sales would have increased by 13%.
Sales Denominated in Other Currencies
Although our financial results are reported in U.S. Dollars, a portion of our sales were generated in currencies other than the U.S. Dollar, such as the Euro, Chinese Renminbi, Japanese Yen, Canadian Dollar, Taiwan Dollar, British Pound and Australian Dollar. During the three months ended June 30, 2016, 45% our net sales were denominated in currencies other than the U.S. Dollar.

Retail Sales by Region
 
The following table presents the change in retail sales by region for the three months ended June 30, 2016, compared to the three months ended June 30, 2015:
 
 
Three Months Ended
June 30, 2016
Change in Retail Sales
Americas
 
7
%
EMEA
 
24

Asia Pacific
 
12

 
Americas:
 
Retail sales in the Americas region increased 7% during the three months ended June 30, 2016, compared to the same period of the prior fiscal year. If currency exchange rates had been constant in the three months ended June 30, 2016 and 2015, our constant dollar retail sales would have increased 8% in the Americas. This increase was led by growth in Mobile Speakers and Audio-PC & Wearables.
 
EMEA:
 
Retail sales in the EMEA region increased 24% during the three months ended June 30, 2016, compared to the same period of the prior fiscal year. If currency exchange rates had been constant in the three months ended June 30, 2016 and 2015, our constant dollar retail sales would have increased 22% in EMEA. Excluding the currency impact, this increase was led by growth in Keyboards & Combos, Mobile Speakers, Video Collaboration and Gaming.

Asia Pacific:
 
Retail sales in the Asia Pacific region increased 12% during the three months ended June 30, 2016, compared to the same period of the prior fiscal year. If currency exchange rates had been constant in the three months ended June 30, 2016 and 2015, our constant dollar retail sales would have increased 14% in Asia Pacific. We achieved sales increases in Video Collaboration, Keyboards & Combos, and Gaming, during the three months ended June 30, 2016.


31

Table of Contents

Net Retail Sales by Product Categories
 
Net sales by product category for the three months ended June 30, 2016 and 2015 were as follows (Dollars in thousands):
 
 
Three Months Ended
June 30,
 
 
2016
 
2015
 
Change
Mobile Speakers
 
$
57,296

 
$
40,544

 
41
 %
Audio-PC & Wearables
 
56,579

 
45,699

 
24

Gaming
 
56,500

 
43,670

 
29

Video Collaboration
 
23,910

 
21,176

 
13

Home Control
 
11,167

 
10,254

 
9

Pointing Devices
 
116,783

 
116,985

 

Keyboards & Combos
 
118,019

 
105,829

 
12

Tablet & Other Accessories
 
13,885

 
18,809

 
(26
)
PC Webcams
 
25,262

 
21,681

 
17

Other (1)
 
463

 
741

 
(38
)
Total net retail sales
 
$
479,864

 
$
425,388

 
13


(1) Other category includes products that we currently intend to transition out of, or have already transitioned out of, because they are no longer strategic to our business.
Retail Sales by Product Categories
Music market:
 
Mobile Speakers
 
Our retail Mobile Speakers category is made up entirely of Bluetooth wireless speakers.

Retail sales of Mobile Speakers increased 41% for the three month period ended June 30, 2016, compared to the same period of the prior fiscal year. Mobile Speaker sales increased primarily due to the introduction of the UE BOOM 2 in the second quarter of fiscal year 2016 and the continued success of the UE Megaboom.

Audio-PC & Wearables
 
Our retail Audio-PC & Wearables category comprises PC speakers, PC headsets and earbuds.

Audio-PC & Wearables sales increased 24% for the three months ended June 30, 2016, compared to the same period of the prior fiscal year. The increase was driven by the new product introduction of the Jaybird X2 Sport Bluetooth and Freedom F5 earbuds, resulting from the Jaybird Acquisition in the first quarter of fiscal year 2017 (see Note 3 - "Business Acquisition" to the condensed consolidated financial statements).

Gaming market:

Gaming
 
Our retail Gaming category comprises Gaming mice, keyboards, headsets, gamepads and steering wheels.
 
Retail sales of Gaming increased 29% for the three months ended June 30, 2016, compared to the same period of the prior fiscal year. Gaming sales increased significantly primarily driven by the new product launch of our G502 Proteus Spectrum gaming mouse and increased sales from our G29 Driving Force Race Wheel.


32

Table of Contents

Video Collaboration market:

Video Collaboration

Our retail Video Collaboration category primarily includes video products and certain headset products that can connect small- and medium-sized user groups.

Retail sales of Video Collaboration increased 13% in the three months ended June 30, 2016, compared to the same period of the prior fiscal year. The increase was primarily due to growth in our conference cams, including the Logitech Group conference camera introduced in the fourth quarter of fiscal year 2016, in addition to strong sales from our C930e Webcam.

Home market:

Home Control
 
Our retail Home Control category comprises our Harmony branded products.
 
Home Control retail sales increased 9% in the three months ended June 30, 2016, compared to the same period of the prior fiscal year. This increase primarily was due to successful sales from our Harmony Elite.
 
Creativity and Productivity Market:

Pointing Devices
 
Our retail Pointing Devices category comprises mice, touchpads and presenters.
 
Retail sales of Pointing Devices remained flat in the three months ended June 30, 2016, compared to the same period of the prior fiscal year.

Keyboards and Combos
 
Our retail Keyboards & Combos category comprises PC keyboards and keyboard/mice combo products.
 
Retail sales of Keyboards & Combos increased 12% in the three months ended June 30, 2016, compared to the same period of the prior fiscal year. The sales increase was primarily driven by strong sales in both keyboard and keyboard combination cordless product types compared to the same period of the prior fiscal year.

Tablet & Other Accessories
 
Our retail Tablet & Other Accessories consists of keyboards for tablets and covers for tablets as well as other accessories for mobile devices.
 
Retail sales of Tablet & Other Accessories decreased 26% in the three months ended June 30, 2016, compared to the same period of the prior fiscal year. The reduction in sales reflects the combination of a declining market for iPad shipments, partially offset by the new product introduction of the Create backlit tablet keyboard case for iPad Pro.

PC Webcams
 
Our retail PC Webcams category comprises retail webcams for consumer applications.
 
Retail PC Webcams sales increased 17% in the three months ended June 30, 2016, compared to the same period of the prior fiscal year. The increase was primarily driven by strong sales of our HD Pro Webcam C920.


33

Table of Contents

Other
 
This category comprises a variety of products that we currently intend to transition out of, or have already transitioned out of, because they are no longer strategic to our business. Products currently included in this category include TV camera, TV and home speakers, Keyboard/Desktop accessories, and music docks.

Gross Profit
 
Gross profit for three months ended June 30, 2016 and 2015 was as follows (Dollars in thousands):
 
 
Three Months Ended
June 30,
 
 
2016
 
2015
 
Change
Net sales
 
$
479,864

 
$
447,686

 
7
%
Cost of goods sold
 
309,625

 
289,753

 
7

Amortization of intangible assets and purchase accounting effect on inventory
 
1,613

 

 
NM

Gross profit
 
$
168,626

 
$
157,933

 
7

Gross margin
 
35.1
%
 
35.3
%
 
 
 
NM=Not Meaningful.

Gross profit consists of net sales, less cost of goods sold, which includes materials, direct labor and related overhead costs, costs of manufacturing facilities, royalties, costs of purchasing components from outside suppliers, distribution costs, warranty costs, customer support, outside processing costs and write-down of inventories, and less amortization of intangible assets and purchase accounting effect on inventory, which includes $0.7 million from purchase accounting effect on inventory and $0.9 million from amortization of intangible assets from developed technology as a result of the Jaybird Acquisition.
 
Gross margin decreased for the three months ended June 30, 2016 compared to the same periods of the prior fiscal year. The decrease in gross margin is primarily driven by amortization of intangibles assets and purchase accounting effect on inventories from the Jaybird Acquisition during the current period, and the unfavorable fluctuations in currency exchange rates, partially offset by product cost reductions, and savings from supply chain efficiency.

Operating Expenses
 
Operating expenses for the three months ended June 30, 2016 and 2015 were as follows (Dollars in thousands):
 
 
Three Months Ended
June 30,
 
 
 
2016
 
2015
 
Change
 
Marketing and selling
 
$
83,872

 
$
75,796

 
11
 %
 
% of net sales
 
17.5
 %
 
16.9
%
 
 

 
Research and development
 
31,951

 
28,002

 
14

 
% of net sales
 
6.7
 %
 
6.3
%
 
 

 
General and administrative
 
25,740

 
28,812

 
(11
)
 
% of net sales
 
5.4
 %
 
6.4
%
 
 

 
Amortization of intangibles and acquisition related costs
 
1,293

 
168

 
670

 
% of net sales
 
0.3
 %
 
%
 
 
 
Restructuring charges (credits), net
 
(85
)
 
11,538

 
(101
)
 
% of net sales
 
 %
 
2.6
%
 
 

 
Total operating expenses
 
$
142,771

 
$
144,316

 
(1
)
 
% of net sales
 
29.8
 %
 
32.2
%
 
 

 
 

34

Table of Contents

Marketing and Selling
 
Marketing and selling expenses consist of personnel and related overhead, corporate and product marketing, advertising, trade shows, customer and technical support and facilities costs, and amortization of intangible assets.
 
During the three months ended June 30, 2016, marketing and selling expenses increased 11% compared to the same period in the prior fiscal year. The increase is primarily driven by the increase in personnel related costs due to the increased headcount during the last twelve months to expand the marketing team to support the advertising and marketing efforts for our products, as well as the increased headcount resulting from the Jaybird Acquisition.

 Research and Development 

Research and development expenses consist of personnel and related overhead, contractors and outside consultants, supplies and materials, equipment depreciation and facilities costs, all associated with the design and development of new products and enhancements of existing products.
 
During the three months ended June 30, 2016, research and development expenses increased 14% compared to the same period in the prior fiscal year. The increase is primarily driven by the increase in personnel related costs due to the increased headcount to support the launch of new products during the current period and increased headcount from the Jaybird Acquisition.
 
General and Administrative
 
General and administrative expenses consist primarily of personnel and related overhead costs for the finance, information systems, executive, people & culture, legal and facilities functions.

During the three months ended June 30, 2016, general and administrative expenses decreased 11% compared to the same period in the prior fiscal year. The decrease was primarily due to a $3.5 million reduction related to the prior year's accrual for our settlement with the SEC (see "Note 12 - "Commitments and Contingencies" to the condensed consolidated financial statements for more details).

Amortization of Intangibles and Acquisition-Related Costs

Amortization of intangibles and acquisition-related costs consist of amortization of acquired intangible assets including customer relationships and trade names, and acquisition-related costs including legal expense, due diligence costs, and other professional costs incurred for Jaybird Acquisition.

The increase during the three months ended June 30, 2016 compared to the same period in the prior fiscal year was primarily due to the Jaybird Acquisition. Amortization of intangible assets and acquisition-related costs were $0.8 million and $0.5 million, respectively, for the three months ended June 30, 2016.

Restructuring Charges
 
The following table summarizes restructuring-related activities during the three months ended June 30, 2016 (in thousands).
 
 
Restructuring
 
 
Termination
Benefits
 
Lease Exit
Costs
 
Total
Accrual balance at March 31, 2016
 
$
6,275

 
$
125

 
$
6,400

Credits, net
 
(85
)
 

 
(85
)
Cash payments
 
(1,908
)
 
(125
)
 
(2,033
)
Accrual balance at June 30, 2016
 
$
4,282

 
$

 
$
4,282


Termination benefits were calculated based on regional benefit practices and local statutory requirements. Lease exit costs primarily relate to costs associated with the closure of existing facilities.


35

Table of Contents

Other Expense, Net
 
Other expense, net for the three months ended June 30, 2016 and 2015 was as follows (in thousands):
 
 
Three Months Ended
June 30,
 
 
2016
 
2015
Investment income related to deferred compensation plan
 
$
192

 
$
100

Currency exchange loss, net
 
(999
)
 
(1,162
)
Other
 
(201
)
 
43

 
 
$
(1,008
)
 
$
(1,019
)

Currency exchange gains or losses relate to balances denominated in currencies other than the functional currency in our subsidiaries, as well as to the sale of currencies, and to gains or losses recognized on foreign currency exchange forward contracts. We do not speculate in currency positions, but we are alert to opportunities to maximize foreign exchange gains and minimize foreign currency exchange losses.
 
Provision for Income Taxes
 
The provision for (benefit from) income taxes and effective tax rates for the three months ended June 30, 2016 and 2015 were as follows (in thousands):
 
 
Three Months Ended
June 30,
 
 
2016
 
2015
Provision for (benefit from) income taxes
 
$
3,057

 
$
(7
)
Effective income tax rate
 
12.2
%
 
(0.1
)%
 
The change in the effective income tax rate for the three months ended June 30, 2016, compared to the three months ended June 30, 2015, is due to the mix of income and losses in the various tax jurisdictions in which we operate. In the three months ended June 30, 2015, there was a discrete tax benefit of $2.2 million from the preferential income tax rate reduction pursuant to the High and New Technology Enterprise Program in China.

As of June 30 and March 31, 2016, the total amount of unrecognized tax benefits due to uncertain tax positions was $70.3 million and $69.9 million, respectively, al